3/1 year arm mortgage rates & easy to understand explanation

A 3/1 adjustable rate mortgage has a fixed rate of interest for
the first 3 years & then adjusts annually for the next 27 years. The
interest rate is usually lower than the 30 year & 5/1 arm interest
rate. The benefit is a lower monthly mortgage payment (at least for
the first 36 months) & higher borrowing capacity.

What are 3/1 arm loans?

The 3/1 adjustable rate mortgage (ARM), also called a hybrid arm, is a combination of a
fixed rate mortgage for the first 3 years (36 payments) and a one
year adjustable rate mortgage. After the first 3 years (36
payments), the interest rate is subject to change each year for the
remaining life of the loan. The interest rate adjustment is based on
a predetermined formula.

Why use a 3/1 arm?

If you will be in your house for less than three years, you will
save money by choosing the 3/1 ARM because the interest rate is less
than a 30 year fixed rate mortgage. The 3/1 arm is a popular choice
for corporate and federal gypsies.

Do you want (or need) to qualify for a larger loan? The lower
initial interest rate of a 3/1 arm can help you qualify for a bigger
loan, which means you can purchase a more expensive house.

Because the 3/1 arm provides a lower monthly payment for the first 3 years, the savings can be used for college savings, investments,
retirement, home expenses, etc.

What are the disadvantages of the 3/1 ARM loan?

The obvious disadvantage of the 3/1 ARM loan is that after the
first 3 years, the monthly payment can increase every year if the
interest rate goes up. It may be hard to come up the extra money
every month for a higher monthly payment if your income doesn't
increase along with the rates.

The "new" interest rate is defined in the mortgage that you agree
to. The adjustment is based on a formula using an index for the
previous 52 weeks. However, the 3/1 arm usually "caps" the maximum
interest rate increase to one or two percent over the previous year,
and limits the total interest rate limit to 3 percent over the
initial interest rate.

Can a 3/1 arm be refinanced?

Yes. Many home buyers use the 3/1 arm to qualify for a more
expensive house and will then refinance the 3/1 arm within the 3 year
period.

Does FHA offer 3/1 arm?

Yes, although, the 3/1 arm is not originated directly from the
FHA, but through approved lenders. The FHA permits lenders to offer
two adjustment options:

the interest rate on the FHA 3/1 ARM can increase only one
percentage point annually, and five percentage points over the life
of the mortgage; or
the interest rate can increase of two percentage points annually,
and six points over the life of the mortgage.

The calculators and information contained herein are made available to
you as a self-help tool for illustrative use only. Examples are hypothetical.
We can not and do not guarantee the applicability or accuracy in regards
to your individual circumstances. I encourage you to seek personalized advice
from qualified professionals.